Why retirement fund managers cannot go gaga over crypto, and more
Retirement fund managers are unlikely to make big allocations to the current universe of crypto assets, even if the regulations were amended to allow for it. Mike Adsetts, Deputy Chief Investment Officer of Momentum Investments said that funds’ future exposures to crypto assets would likely remain small due to concerns over safe custody and volatility, among others. “You could potentially consider specific opportunities, such as an exchange traded fund linked to crypto assets and backed by a bank balance sheet, but you would struggle to class this as a conservative investment that could function as a growth vehicle in a retirement fund,” he said in a wide-ranging interview with FAnews.
And the most-watched regulations are…
The discussion quickly steered towards the change to offshore allocations in regulation 28 compliant funds. As announced by the Minister of Finance in his February 2022 Budget Speech, local asset managers can now take up to 45% of assets under management in these funds offshore without having to invest any of this allocation in the rest of Africa. This is big news for an industry that rates exchange control and regulation 28 of the Pension Funds Act (PFA) as its most-watched regulations. “For us, the big focus is on exchange control and then the PFA, regulation 28 is important because it introduces guardrails in terms of how we can invest,” said Adsetts.
Asset and retirement fund managers have been critical of the caps imposed by regulation 28 despite acknowledging the need for prudential limits for long-term retirement capital. “In the case of retirement capital we are focused on the accumulation of long-term savings, and it is reasonable and prudent from an industry perspective that exposures to things like unlisted investments or crypto assets, when these are allowed, are reasonably low,” he said, adding that the argument might be different for retail investors who were trying to achieve specific, non-retirement savings objectives.
The fact that investors do not save enough for their retirement becomes an argument in favour of prudential limits. In this context, the temptation is for savers to increase their exposure to riskier asset classes in a misguided attempt to accelerate growth on an insufficient capital lump sum. Sensible caps thus prevent investors from taking on a level of risk that is inappropriate, protecting them from poor long-term retirement outcomes. Another issue worth mentioning is that of liability matching or ensuring that the retirement funding instrument is suited to the environment in which it must perform. The main problem that asset managers are trying to solve in the pension fund space is to deliver solutions that protect retirement fund members’ savings from the ravages of local inflation.
Too big a slice of the pie
Momentum Investments is not the first asset manager to tell us that they are unlikely to immediately use up the new 45% offshore cap. According to Adsetts they were already invested offshore pretty much at the limit of what most quantitative approaches indicate. “Much of the modelling that we have seen over the years points to a strategic exposure of around 40% offshore over the long-term, so even if the regulations allow you to go to 45% you might not want to increase as far as that,” he said. Asset managers must also account for the concentration of rand hedge shares in their South African equity investments. It is common knowledge that many JSE-listed companies earn a significant slice of their revenue offshore, despite being counted under the local equity limit.
The Minister of Finance’s announcements re raising the offshore cap seemed counterintuitive given recent rumblings about regulating retirement funds to commit more funding to local infrastructure projects. “It is sort of a feature of the regulatory landscape that regulations sometimes run counter to each other,” mused Adsetts. “In this case, by allowing more assets offshore the Minister may have reduced the local investable asset pool, because by-and-large asset managers are going to increase their offshore exposures”. It turns out the balance between onshore and offshore is probably less critical than avoiding unlisted and illiquid assets, with few retirement funds prepared to invest up to the pre-existing cap for infrastructure.
Green investing and the just transition
One cannot have a discussion about retirement fund management without considering the ongoing drive to incorporate environmental, social and governance (ESG) factors in investment decision making. “Governance has been a key feature of investment decision making for a long time; nowadays we see a lot of pressure from both government and multilaterals to start addressing the social and environmental concerns,” said Adsetts. Fund managers are being called on to invest in financial instruments that notionally support climate change initiatives such as the net zero carbon emissions targets announced at COP26.
Although the focus on environmental and social aspects is welcomed, there are local challenges that must be worked around. Adsetts commented that South Africa would have to focus on social aspects to address endemic inequality and poverty. “The local approach has been how do you balance the social and governance aspects? And this debate has sort of culminated in initiatives like the just transition,” he said. The question that asset managers are wrestling with is how to move to a greener economy without leaving vast sections of the local population behind. For example, you cannot drive a hasty transition away from coal mining when entire communities depend on that industry for their very survival.
South Africa’s just transition is further compounded by the tenuous state of our coal-based electricity production infrastructure. “If the entire investment industry refused to invest in Eskom we will end up with a very green environment but without electricity,” said Adsetts.
Offshore allowance introduces flexibility
The good news is that the higher offshore allowance should allow retirement fund managers more flexibility in achieving environmental and social exposures. Locally, their approach might remain on unlisted infrastructure-type investments into cleaner coal or solar and wind projects; but globally the opportunity exists to achieve environmental impact by applying exclusions when investing in listed companies.
“The investment industry is moving into a slightly different environment, punctuated by different decision making criteria coming into play,” concluded Adsetts. “In this context the offshore or global lever within a portfolio becomes far more significant”. The industry will have to adapt to accommodate the emerging ESG trend, while some level of consolidation is inevitable as asset managers seek to retain scale efficiencies against a backdrop of ongoing compliance cost pressures.
Writer’s thoughts:
The answer to many “what if?” questions can be found by revisiting the fundamentals… As such, questions like “can a retirement fund invest in crypto assets?” must be unpacked in light of the retirement fund’s reason for being… Do you agree that crypto assets are too risky for inclusion in retirement funds? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts [email protected].
